How To Track Your Net Worth And Why It Matters

Abby Ryan has painted a new painting every day for the past eight years. I learned about Abby from Seth Godin, who has published a blog post every day for the past 6,000 days. Allow me to add my story to their amazing examples of dedication and perseverance--I've tracked our net worth since 2003.

It started just before my wife and I upgraded to a bigger home. As a large home is apt to do, it came with a brand new jumbo mortgage. Scared straight by the big loan, I cracked open a spreadsheet and started recording numbers. It wasn't always pretty.

At first rising home prices made our net worth fatter than a tick, as my mom would say. Then came the Great Recession. It's no fun watching both the value of investments and a home evaporate at the same time. Make note of that the next time a financial advisor asks how you'd respond to a 20% decline in the stock market. The better question is how you'd respond to a 20% drop in stocks, a 20% drop in home values, unemployment at 10%, and the financial system teetering on the edge of oblivion. But I digress.

Having stuck to our investment plan, we've been rewarded over the past several years. Home values are up, and the stock market has rebounded more fiercely than the Round Mound of Rebound.

Let's be clear. Tracking your net worth is the easiest, most important step you can take to improve your finances. Here's why and how to do it.

Why Track Your Net Worth

Net worth is the single most important financial metric one can track. It's more important than a person's salary or monthly budget. Why? It represents the sum total of your entire financial life, reduced to a few numbers. It shows you all of the assets you've accumulated over your lifetime. It shows you all of your current debts. The difference between the two is your net worth.

To really understand the power of net worth, it's important to see how it relates to a monthly budget.

Each month for most people income brings money in and expenses send money out. For those who make more than they spend, the difference adds to their net worth. The difference my result in an increase to a savings or retirement account. Alternatively, the difference may go to pay down credit card, student, auto or other debts. Either way, net worth goes up.

For those who spend more than they make, the difference lowers their net worth. It may result in a decrease in savings or an increase in credit card debt. Again, either way, net worth goes down.

The point is that net worth is the financial scoreboard. It shows your day to day and month to month progress on a grand scale. It's also very easy to track.

How to Track Your Net Worth

A net worth statement is simply a list of assets owned and debt owed. For most individuals, it should easily fit on a single page. To track your net worth only two decisions need be made: (1) what should be included in the net worth statement; and (2) what tools, if any, should one use. Let's look at both of these.

For purposes of monitoring your finances, it's not necessary to include literally every asset you own. I include all financial accounts (e.g., checking, savings, investments, retirement accounts), real estate and businesses.

I do not include personal property, such as vehicles or furniture. Many people include the value of their vehicles, in part to offset the impact of having car loans. I don't include vehicles or other assets that depreciate over time. All debts are included on the statement.

Most assets are easy to value. Two potential exceptions are real estate and businesses. My approach is to be very conservative on the valuation. For real estate, I use Zillow's zestimate. I've found that it undervalues real estate. When you factor in the costs of selling real estate and potential tax liabilities, however, it's reasonably accurate.

As for tools, there are several free and low cost options. The first is a spreadsheet. A simple
Google Sheets spreadsheet is a great way to track your net worth. You can find a free template here.

There are also several automated tools to track your net worth. Some of the more popular options include Mint and Personal Capital. These options not only track your net worth, but also provide excellent tools for evaluating investments and managing your budget. Personal Capital also enables you to connect directly to Zillow to track the value of real estate.

How to Evaluate Your Net Worth

Tracking your net worth is just the first step. It's also important to evaluate the results from time to time. One key way to evaluate the results is to monitor the change in your net worth over time.

There are any number of important financial goals. Common goals include getting out of debt, saving for retirement, and buying a home. Measuring the change in your net worth over time encapsulates each of these goals into a single, easy to understand metric. If you use a spreadsheet to track your net worth, creating a chart of your progress is easy as this example chart shows:

It's also important to evaluate your net worth in the context of your income and age. A net worth of $1 million may be impressive for a middle-aged teacher, but no so impressive if you happen to be LeBron James. A quick and easy way to make this assessment is to use Money Ratios.

I am an investor, lawyer, blogger, husband, father, and Buckeye fanatic. I graduated in 1992 from law school and have worked in private practice, in-house for a publicly traded company, and for a regulator in the securities industry.
I've written about building wealth ...